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The December quarter earnings have, so far, been mixed and are expected to remain so because of prolonged weakness in the domestic economy that is likely to persist in the near term.
Most brokerages and several media reports see the banking and financial sector as the only bright spot in a gloomy Q3. But they too warn against expecting too much from the segment as the Indian banking sector is witnessing weak undercurrents on multiple fronts.
Brokerages say the problem is not just demand-related but is likely on the supply side, too, as manufacturers take time to adjust to changing consumer preferences.
Moreover, banks’ reluctance to lend and regulations that need easing to boost sentiment for a capex cycle revival have made the situation worse.
Should you look at banking stocks?
In a January 12 report, brokerage firm BNP Paribas said its key expectations from Q3FY20 results are loan growth should moderate significantly in line with the economic slowdown (13.5 percent YoY against 15.4 percent in Q3FY19) and large asset recoveries should lead to lower net slippages and credit cost on a yearly basis.
Despite this, BNP Paribas believes private banks are on track to gain about 370 bps in return on equities (RoE) over FY20-24, which should justify a 10-15 percent valuation uptick.
HDFC Bank, Kotak Mahindra Bank and Axis Bank are the top picks of BNP Paribas, while it sees a 33 percent upside in State Bank of India and an almost 31 percent in IndusInd Bank.
Recommendations of BNP Paribas
Recommendations of JM Financial
Brokerage firm JM Financial, too, believes large private banks such as ICICI Bank, HDFC Bank and Axis Bank, with better economies of scale, strong liability franchises and lower exposures to weaknesses in mid-corporates and SMEs, will continue to gain market share. It prefers them over PSUs and smaller private banks.
“Improvement in the corporate rating profiles in the loan book, and lower exposures to newer stressed names will aid the normalisation of credit costs for ICICI Bank and Axis Bank, which should drive RoE expansion. HDFC Bank remains the undisputed leader in retail lending and we continue to prefer it, given comfortable valuations,” JM Financial said in a report on January 9.
Recommendations of Anand Rathi Shares & Stock Brokers
The brokerage said strong positioning, healthy balance sheet growth and superior asset quality and management make HDFC Bank a stock to evaluate closely. ICICI Bank’s declining credit cost on lower slippages and much adequate provision coverage ratio make it a stock to evaluate closely.
Axis Bank registered a CAGR of 15 percent in the last four years and the brokerage expects the company to grow its standalone NII at a CAGR of 19 percent over the two financial years.
For DCB Bank, the brokerage expects the business growth to be strong and asset quality to stabilise in the medium term.
Indian Bank will benefit from healthy capitalisation and favourable credit deposit ratio. Higher margins, treasury income and stable credit costs led to Indian Bank’s strong Q2FY20 earnings growth. The stock price has fallen steeply on the announcement of its amalgamation with Allahabad Bank.
Recommendations of Reliance Securities
Mona Khetan, a banking analyst at Reliance Securities, also prefers ICICI Bank and HDFC Bank.
“Led by dwindling headwinds on asset quality front and improving balance sheet, ICICI Bank is expected to deliver sustained improvement across operating metrics with RoE improving to 16 percent by FY21E (4 percent in FY19). Further, its strong liability franchise with the industry-best CoF add to our comfort,” Khetan said.
Despite outperforming peers over the last one year and the stock trading close to all-time-high valuations, Khetan believes there is scope for an upside or re-rating as key concerns of the past, including corporate governance issues, wholesale asset quality and inefficient capital allocation, are behind the bank now.
At the current market price, the stock trades at 2.9 times of FY21E. Reliance Securities has a buy recommendation on ICICI Bank with a target price of Rs 600.
For HDFC Bank, Reliance Securities has a target price of Rs 1,430.
“HDFC Bank is well-positioned on the loan growth front, having delivered a healthy growth even in the current weak environment. Additionally, improving operating efficiency and tax cuts are like to aid RoA expansion to 2 percent by FY21E,” Khetan of Reliance Securities said.
At the current market price, the stock trades at FY21E multiple of 3.6 times.
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